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Independent Contractors – Say It Isn’t So…

Beware… Just designating a California worker as an “independent contractor” in a contract or job description does not mean the employer can bank on it.

In Narayan v. EGL Inc. 2010 DJDAR 10844 (9th Cir. July 13th 2010), an air & ocean freight service provider with 400 facilities in over 100 countries hired 3 workers in California to drive freight pick-up and delivery trucks; their contracts stated they were “independent contractors” and that Texas law governed the contracts. The drivers sued for California-mandated overtime pay, reimbursements and meal periods.

The Narayan court noted that out-of-state companies that operate in California must adhere to California’s labor laws. Further, the Texas choice-of-law clause only related to the terms of the contract itself’ and since the drivers’ claims did “not arise out of the contract,” their claims related to benefits under California Labor Code – which in turn depended on whether they were EGL “employees.”

Interestingly, the court found that California law, and not the contracts, governed the independent contractors vs. employee issue. And California Labor Code was designed, in part, to defeat an employer’s attempt to evade the “Code’s protections;” therefore, out-of-state businesses with California operations should be careful to analyze the following factors to determine if a worker is an independent contractor or an employee (based on the California Supreme Court case of S.G. Borello & Sons Inc. v. Dept. of Industrial Relations, 48 Cal.3d 341 (1989)):

Worker’s investment in equipment or materials required for task, or employment of helpers

Whether service rendered requires special skill

Degree of permanence of working relationship

Whether service rendered is integral part of alleged employer’s business

A worker will more likely be classified as an “independent contractor” if the result of the work, and not how it is accomplished, is the dominant factor i.e. right to control (#1 above). Further, the worker must be routinely engaged in an independently established business – not merely deemed an independent contractor as a subterfuge to avoid employee status.

The consequences of misclassifying a worker as an independent contractor rather than an employee can be expensive due to civil lawsuits (just ask Microsoft), as well as state initiated actions by the California Labor Commissioner and Employment Development Department who are cracking down on employers who misclassify workers as independent contractors.